There are many high net worth individuals in the greater Dallas area, and when you have been financially successful throughout your life, you have to be aware of potential estate tax exposure. The federal estate tax carries a whopping 40 percent maximum rate, so your wealth can be significantly eroded if you take no steps to gain estate tax efficiency.
The estate tax is only a factor for high net worth individuals because there is a relatively large credit or exclusion. The exclusion is the amount that you can pass along before the estate tax would be applicable. Only the portion of your estate that exceeds this amount would be subject to taxation.
At the time of this writing late in 2015, the exact amount of the federal estate tax exclusion stands at $5.43 million. There are annual adjustments to account for inflation, so when the new year arrives, you may see a somewhat higher number.
Unlimited Marital Deduction
This $5.43 million exclusion would be used to transfer assets tax-free to anyone other than your spouse. There is an unlimited marital deduction, and you can use this deduction to transfer unlimited property to your spouse in a tax-free manner.
However, if you are married to a citizen of another country, you cannot use the estate tax marital deduction.This is because of the fact that a non-citizen could return to his or her country of citizenship with a tax-free inheritance, and the IRS would never get its cut.
Qualified Domestic Trusts
If you are married to a citizen of another country, and you are exposed to the estate tax, there is a tax efficiency tool that can be utilized called a qualified domestic trust. With this type of trust, you name a trustee to handle the trust administration tasks, and your spouse would be the first beneficiary. You would also name a secondary beneficiary to assume ownership of assets that remain in the trust after the death of your spouse.
Assuming you do in fact predecease your spouse, the trustee would distribute earnings from the trust to your spouse throughout the rest of his or her life. These distributions would not be subject to the estate tax, but they would be subject to regular income taxes.
Under certain circumstances, the trustee could distribute portions of the principal, but the estate tax would be applicable on any such distributions.
After the death of your spouse, the secondary beneficiaries would assume ownership of the remainder that is in the trust, and this transfer would be subject to the estate tax.
Free Report on Federal Estate Tax
If you would like to learn more about the federal estate tax and the tax efficiency strategies that can be utilized, download our special report on the subject. The report is free, and you can visit this page to access your copy: Estate Tax Report.